Demand response in PJM markets: 'A world of great uncertainty'

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Right now, nobody really knows just what will happen to demand response in the PJM marketplace. But early reports—Maryland recently signed off on results of a supply solicitation—indicate that uncertainty in proposed market rule changes has already reduced the competitiveness of supply.

“Right now we're in a world of great uncertainty. Nobody knows what the next step is,” said Michael Panfil, an attorney for the Environmental Defense Fund's Clean Energy Program.

That seems to be the general consensus, because a lot is happening at once. The U.S. Court of Appeals for the District of Columbia Circuit recently issued a stay on its decision to vacate FERC Order 745. That gives regulators until Dec. 16 to decide if they will appeal to the Supreme Court. While the court's decision vacating 745 was specific to power markets, FirstEnergy has filed a legal challenge aimed at booting demand response out of the wholesale capacity market as well.

In the wake of the court's decision, and with an eye towards developing a stop-gap measure until recent events shake out, the grid operator has sketched a plan it says can help keep demand response functioning as a resource in the PJM marketplace.

PJM's plan would focus on utilities

“Load serving entities, in partnership with their customers (often under state programs), can manage their wholesale consumption, lower their forecast demand requirements and actively manage their consumption of energy at the peaks to lower their capacity obligations,” PJM said in a white paper sketching its approach to demand response in the wake of the court activities.

The grid operator said it can and does account for demand response in planning and procurement decisions in the wholesale market. Nothing in the court's decision, PJM said, would prevent it from taking actions to recognize wholesale curtailment efforts.

“In PJM’s view, the jurisdictional divide between wholesale and retail under the EPSA reasoning allows PJM to account for curtailment only to the extent it reflects the action of a wholesale entity, such as a load-serving entity or competitive retail service provider, and only to the extent such curtailment reflects that entity’s own wholesale load,” the operator said.

But accounting for demand response and paying for it are different things, and PJM's proposal notes that it will be clearing capacity auctions in 2015, including the Base Residual Auction in May.

“The form by which demand is eligible to participate in these auctions ideally would be known before conducting such auctions,” PJM said. “Pursuing creative but untested notions ofdemand as a demand resource in upcoming capacity market auctions and thus facing the prospect of several years of uncertain administrative and judicial litigation serves to undermine completely the very purpose of the capacity market—namely, to provide a certain stream of forward revenues to assist capital formation for resource investment.”

A way forward for demand response

PJM has proposed a way forward for demand response in its energy and capacity markets. The operator has proposed allowing DR to participate, but PJM's markets would not separately compensate demand. “State programs, of course, could offer added incentives to both wholesale and retail market participants,” PJM said.

Load-serving entities will also be able to participate in demand response. PJM says it would base plans and procurement decisions "on commitments bid into PJM's markets by wholesale market entities."

"Those entities have ... an obligation," PJM's white paper continues, "to serve specified retail load and can commit to reduce their wholesale load based on curtailment commitments or alternate supply (behind the meter) which they arrange with their end-use retail load."

But even with the involvement of load-serving entities, PJM says third-party curtailment providers will still have an important role in "partnering with load-serving entities to provide their customer management expertise."

What does that mean? According to EDF's Panfil, if demand response “is going to thrive, the only option left then is the state.”

States must step up

“Demand response would be allowed to compete [under PJM's proposal], but on uneven footing,” Panfil explained. “About 70% of PJMs market for demand response comes from third party aggregators—from demand response providers who are not utilities. What the proposal would do, is say those parties can no longer part in our marketplace. Only utilities can participate."

“And to make matters worse, they're saying yes you can provide this valuable asset, but we're not going to compensate you,” Panfil said. “That's why you do need states to step up.”

No one really thinks demand response is going away—the resource is simply too large and valuable. Business models are built around it, power prices lowered and new generation avoided. Results of PJM's capacity auction in May yielded 10,975 MW of demand response resources and the operator noted that there was a shift to types of resources that have more flexibility and a greater contribution to reliability.

“You've got all these megawatts in the market for demand response. It's the single largest power plant in all of PJM, if you think of it like a single virtual power plant,” said EnerNOC senior vice president of marketing and sales Gregg Dixon. EnerNOC is a leading provider of demand response software solutions, and FirstEnergy's court filing attacking capacity markets represents a significant threat to the company. “If it can no longer participate in the market construct that exists today, where would they participate?" he asked.

The consequences of uncertainty

The proposed rule changes may already be having an impact. Maryland regulators have accepted the results of a supply auction, but consultant Boston Pacific said analysis showed declining participation because of rule changes in the PJM capacity markets. The firm noted that in the April solicitation there was about 3 MW bid for every 1 MW of need, but the October auction returned only 1.8 MW of bids.

"The primary cause of reduced competition in this RFP was uncertainty over PJM’s capacity market," Boston Pacific said in its testimony to state regulators. "While PJM continues to put out more information ... This process will take several months.” The firm noted in analysis this month that demand response capability totals approximately 6% of PJM’s total system peak load.

Physically, says Panfil, electricity is a regional product. “So if you have a marketplace it makes a lot of sense to have something like PJM that's regional. But if demand response is left on the door knocking but unable to get in, you have to construct a state model in a way that makes sense.”

New York and California have both begun to work on the issue, but Panfil notes, “That's two states out of 50. You're still going to need other states to also step up. Whether or not they do it in isolation or in a regional framework remains to be seen. It's easier in some ways at the state level, with less levels or authority.”

Panfil said in 2013 demand response saved PJM $11 billion. “If you were to lose demand response at the wholesale level and it wasn't replaced by anything, it would be very bad for the consumer,” he said.